Are you a first-time property developer looking to acquire your first development site or an experienced property developer looking for your next project? If you said yes to either of those questions then read on.
Selecting an ownership structure for your property development
Choosing an appropriate ownership structure for your property development is fundamental to both the success of the development and your long-term wealth creation and protection goals. Prior to considering any sites for purchase, a property developer should always consider the ownership structure for the project and ideally obtain legal advice from a property lawyer, with experience in property development. Why? well once you have signed a Contract of Sale to purchase, it may be too late and can sometimes be expensive in the event you decide to change the ownership structure for your property development.
There is no one size fits all answer for the best ownership structure as different circumstances influence the nature of the ownership structure best suited to your property development. The property lawyers at Burke Lawyers have prepared a list that we recommend a property developer should seriously consider before they determine the final ownership structure of their property development.
- Consider all stakeholders involved.
- Think about your personal and business objectives.
- Ensure you protect your assets, both current and future.
- Understand the risks associated with each ownership structure.
- Consider any GST, stamp duty and tax obligations and implications associated with the ownership structure.
- Ensure that your chosen ownership structure is commercially viable (from a banking institution perspective, if you require financial assistance).
Some of the most common ownership structures for a property development are:
- Discretionary Trust Structure.
- Company Structure.
- Unit Trust Structure.
What is a Discretionary Trust Structure?
A Discretionary Trust is a type of trust where the trustee has discretion over how to distribute the trust's income and capital to its beneficiaries. A Discretionary Trust will have a trust deed that sets out the rights and obligations of the trustee, the beneficiaries of the trust and the rules for distributing income from the discretionary trust. A common example of this type of ownership structure is a family trust, which is set up for the benefit of family members.
Some advantages of a Discretionary Trust Structure for property developers:
- Flexibility to distribute income and capital.
- The potential tax benefits to the beneficiaries.
- The asset protection offered to beneficiaries as the trustee holds legal title to the property, but the personal assets of the beneficiaries are generally protected from business debts and legal disputes.
- Eligible for 50% CGT concession.
Some disadvantages of a Discretionary Trust Structure for property developers include:
- As the trustee can use their discretion to change allocations, beneficiaries don’t have fixed legal interests in the trust property.
- Depending on how your trust deed is drafted, it may unintentionally be deemed to be a foreign trust, which may have stamp duty implications, amongst other things.
What is a Company structure?
A Company Structure is a separate legal entity controlled by the appointed directors on behalf of the company shareholders (owners). This structure offers limited liability protection to its shareholders, meaning that the personal assets of shareholders are generally protected from business debts and legal disputes, which can be an important consideration where there is a high risk business.
Some advantages of a Company Structure for property developers include:
- The income generated by the company is subject to a ‘company’ tax rate which is lower than the highest marginal tax rate for an individual;
- This structure may be ideal when the individuals involved are not related (family members), as any profit received from the development can be paid out as a dividend to shareholders, but subject to any corporate governing documents.
Some disadvantages of a Company Structure for property developers include:
- Company structures can be more costly to establish, maintain and wind up.
- Directors of a company can be personally liable if they fail to meet their legal obligations.
- No eligibility to receive capital gains concessions and therefore, the company will not receive the 50% Capital Gains Tax discount upon sale of the development.
What is a Unit Trust Structure?
A Unit Trust is a type of trust whereby the trustee holds legal title to the trust property for the benefit of its unit holders (beneficiaries). The trustee manages the trust's affairs on behalf of the unit holders and the beneficial interest in the trust is divided into units (fixed entitlements), which can be bought and sold by investors. A unit trust’s deed will set out the rights and obligations of the trustee, the unit holders of the trust and the rules for distributing income and capital from the unit trust.
Some advantages of a Unit Trust Structure for property developers include:
- It allows multiple investors to pool their resources, making it easier to raise capital for the project, as investors can buy units in the trust and receive a share of the trust's income.
- A unit trust is generally not taxed and instead the unit holders will be taxed on their share of the trust’s income at their own personal income tax rate.
- Eligible for 50% CGT concession.
Some disadvantages of a Unit Trust Structure for property developers include:
- No discretion to trustee for distributing income, all income must be distributed to unit holders in relevant interests.
- Capital or revenue losses cannot be distributed to its beneficiaries.
- Varying the terms of the trust can amount to a resettlement in some circumstances and have CGT and stamp duty consequences.
Other less common ownership structures for property developers include partnerships joint ventures and self managed superfunds.
Whether you are managing a large or small property development the property lawyers at Burke Lawyers are here to help. Our property lawyers including Kristy Muhlhan, an Accredited Specialist Property Law have extensive experience in dealing with all aspects of property and development law including providing guidance and advice on the most suitable ownership structure for your property development based on your personal circumstances
If you would like assistance with your ownership structure or have any other enquiries regarding property development, contact our property lawyers today on +61 3 9822 8588 or email our team HERE